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March 6, 2018

 

When Assets Pass to your Spouse Without an Estate Plan

I’m often asked what happens when you (a Minnesota resident) allow your assets to pass to your spouse without putting an Estate Plan in place.  Few people understand the significant ramifications of failing to put a plan in place.  This article will demonstrate what can happen.

 

When a person dies without having an Estate Plan in place, they are said to have died intestate. “Intestate succession” are the rules of the state court that dictate how a person's assets will pass when they die without an Estate Plan. Although generally the courts attempt to make uniform the law among states and various jurisdictions, The rules of intestate succession may vary from state to state.

 

Typically, if someone dies intestate or without an Estate Plan, their assets would pass to their spouse as long as all children of the deceased are also children of the surviving spouse.  If the decedent has children that are not children of the surviving spouse, the rules change. For example, the surviving spouse who has children from a previous marriage that are not children of the deceased, would receive $150,000 +1/2 of any balance of the estate then the remainder to the decedents descendants.

 

In any event, the majority of the estate if not all, would pass to the surviving spouse.

 

This means that upon death, the surviving spouse receives full control of the assets. The surviving spouse may do whatever he or she wants with the assets exposing them to risk of bankruptcy, creditors, and lawsuits. Further, the surviving spouse can gift the assets to a new boyfriend or girlfriend, a new spouse a charity or really anyone. And if the surviving spouse is financially challenged or vulnerable to poor lifestyle decisions, the assets are further at risk.

 

Maybe you think your spouse would do the right thing.  But, what if your surviving spouse’s memory fails or he/she becomes vulnerable in old age?  Are you okay with knowing your hard-earned money could be gobbled up by a voluptuous predator with big blonde hair and an agenda?  Do you want an Anna Nicole-like figure to make out with your wealth?

Gentleman, let’s say you pass before your wife.  Your grieving wife decides to get away to Mexico to take some weight off of her mind.  While in Mexico and after a few margaritas, she meets Pedro, the cabana boy.  He learns of her recent misfortunes and decides to take advantage of them.  The next thing you know, your wife is financing Pedro’s life-long dream of owning his very own wind-sailing business.

 

Maybe your spouse isn’t the type to replace you with a younger model when you pass, but what if he/she is financially challenged?  Could retail therapy become his/her coping tool?  Is she inclined to spend your wealth on a Jimmy Choo and Louboutin marathon?  Does he have a flair for expensive watches, gambling and sports cars?  If you were the party in your relationship who handled the finances, these are real considerations. 

 

If your spouse were to mismanage your estate and file bankruptcy or end up with a judgement against her/him, your assets are at risk to creditors.

 

If you're a business owner, or a professional practitioner, there are additional concerns.   Any claim made against your business or your practice could result in a judgment. Because the assets are not protected by a trust, those assets can be used to pay down a money judgment.

 

I’ll give you an example: Let’s say Doctor Johnson creates a will for his family.  He passes away and then his estate is sued.  The former patient sues his estate claiming that he engaged in medical malpractice.  If his former patient wins, the patient can then take all of the assets away from the family to pay down the judgment and his family could potentially be left with nothing.  Alternatively, had he created a trust, his assets would have been protected and the former patient who won the lawsuit could not have accessed any of his family’s assets.  The same is true of any ownership interest in a business. 

Now you can see that Trust-based planning is critical for business owners and professionals who face more exposure of lawsuits than the average employee.

The good news is that you can protect your assets from risk of:

  • Bankruptcy

  • Judgments

  • A Financially Challenged Spouse

  • Being Gifted to a new Spouse or Boyfriend/Girlfriend

 

By creating a Trust-Based Estate Plan, you can protect your assets. A trust or in some cases, a series of trusts, can be used to provide protections from the above scenarios.  Terms of the trust will dictate how your assets are used.  By creating marital, family and descendants’ trusts, you may ensure your assets are only used for health, education and maintenance.  Maintenance is for the most part, anything consumable.  It is NOT gifting or investing.  Thereby, the assets within the trusts cannot be gifted to a new spouse or used to invest in Padro’s windsailing business. There’s more:  the magic words “healthcare”, “education” and “maintenance” excludes creditors so the assets in the trust are protected from bankruptcy and judgments.

An experienced EP attorney can design a Trust-based plan to put protections in place to ensure your money passes to your loved one and is not gouged by the Anna and Padros of the world.

 

If you’re a high net-worth person, things get even uglier without a trust-based Estate Plan.  Not only do you have to worry about opportunists or the poor spending habits of your spouse, now you’ve got a bigger, more aggressive enemy that wants your hard-earned wealth:  The government!  This is because the government assesses a tax when you die.

If your estate is valued over 5,450,000.00 in 2016, your heirs should be prepared to hand over a large portion of your wealth to the IRS. 

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.  The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

 

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $11.2M per couple this year. This means that up to $5,600,000 (per individual) are exempt from federal estate taxes.

If you’re like me you’re thinking, “how many people really have an estate valued over $5,450,000.00”?  The truth is, not many.  However, it’s not just the federal government that taxes estates.  Most state governments also want their piece of the pie and so they too tax the transfer of assets at death.  In many cases, the states tax estates that are valued at a much lower rate than the IRS.  In Minnesota, where I’m located, the 2016 exemption is only 1,600,000.00 (per individual).  This means that if your assets exceed 2,400,000.00, your heirs will be paying out estate taxes at your death.

 

Take Prince for example. His death was all over the media.  As you’ve heard, he didn’t have a will.  The truth is that a will wouldn’t have met his needs.  He needed to use a trust to protect his assets from the government. What is astounding is that because he didn’t have a trust, his biggest “heir” is the government.  Over half of his estate will go to the IRS and the state of Minnesota due to estate taxes.  If the estate is worth 250,000,000.00, over 120,000,000.00 will go to the government.  If Prince had put his assets into a trust, many millions in estate taxes would have gone to his intended beneficiaries as opposed to Uncle Sam.

 

These exemption amounts change every year and almost certainly change with party control in the White House.  In the 2016 presidential election, Clinton threatened to reduce the exemption rate so more Americans would be required to pay estate taxes.  Trump on the other hand, threatened to do away with the estate tax at the federal level.  With continuing changes, Americans should consult with an experienced Estate Planning attorney to ensure that they are minimizing the tax on their estate at death.

 

Beginning January 1, 2011, estates of decedents survived by a spouse, could elect to pass any of the decedent’s unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse. Note that simplified valuation provisions apply for those estates without a filing requirement absent the portability election.

 

 

You’ve now discovered that allowing your assets to pass to your spouse without an Estate Plan is not a good idea.  Don’t fall victim to the trap.  Outsmart the system.

 

Lisa Haster is an Estate Planning attorney in Minneapolis, Minnesota.  She is the author of “The Ultimate Guide to Protecting Your Loved Ones from Uncle Sam, Opportunists & Probate”, has been a contributing author to several legal publications and is the founder of JDpreneur Marketing group for lawyers. To schedule a Family Wealth Planning Strategy Session with Lisa, go to  www.LegalTransparency.com and click on Schedule.

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